I am all for the idea of index funds and ETFs, but I am overwhelmed by all of the choice. We have recently dropped our high MER (management expense ratio) mutual funds along with our financial adviser and switched to some lower fee and less volatile mutual funds with our bank. We have a substantial amount of cash that needs to be working harder than it currently is, but my husband is nearing retirement so we cannot afford to lose any capital. Where should we invest our money?
Cash is pretty safe, especially if you keep it in an institution covered by the Canada Deposit Insurance Corporation and not in a shoebox in your freezer. But as you point out, you need to do more with your cash than let it cool in a savings account.
Unfortunately, the pickings are slim. In today’s low interest rate environment it is harder to find “safe” yield than it is to find a decent cup of coffee for under a buck. But the upside of this, if you want to call it that, is your choices are fairly limited so you don’t need to be overwhelmed by the selection. Given your interest in looking at exchange-traded funds, I’ll run through a few options below for bond ETFs. You can also pick up the phone and talk with any of the ETF providers to get more information on different products.
The ETF options from iShares
IShares is the biggest seller of ETFs in Canada. They have a number of options that might work for you, starting with iShares DEX Real Return Bond Index Fund (TSX: XRB). This ETF focuses on real return bonds. All of the holdings are government securities, which while relatively safe and stable, are boring and offer less than impressive yield. The “real return” phrase in the name means that the interest payments on these bonds will rise and fall with inflation, although that hasn’t been a factor lately. The yield on this fund in the last 12 months was just 1.8%, or about what you’d get in a savings account.
The iShares DEX Short Term Bond Index Fund (TSX: XSB) holds government bonds too, but it adds some corporate bonds into the mix—banks and telecom companies for example. You can see in the table below that the corporate bonds give a nice little boost to the yield.
The iShares DEX All Corporate Bond Index Fund (TSX: XBC) as the name implies only holds corporate bonds: banks, telecom companies, along with some retailers and energy names. This product gives you a higher yield, but it comes with added risk. You’ll need to ask yourself if that is risk you are willing to take.
|iShares DEX Real Return Bond Index Fund||XRB||1.80%||0.39%|
|iShares DEX Short Term Bond Index Fund||XSB||2.97%||0.28%|
|iShares DEX All Corporate Bond Index Fund||XCB||4.00%||0.44%|
Before you consider any of these products you should also be aware of how these investments could be affected if interest rates rise. See Ask MoneySense: Bond ETFs for more on how rising interest rates could affect bond ETFs.
Other ETF providers
You are already feeling overwhelmed so I’m not going to go through the products of each of the other firms in great detail. Generally the other ETF providers in Canada have similar product offerings and the fees are competitive. (The selection in the U.S. is much more diverse.)
For example, BMO Financial Group has been putting a big push on its ETFs. It has similar products to iShares and at competitive MERs. In fact, the MER on its real return bond ETF is just 0.29%. Vanguard is relatively new to the Canadian market but has a long and successful history in the U.S. Take the Vanguard Canadian Short-Term Bond Index ETF (TSX: VSB), which has an MER of 0.15%.
Index funds versus ETFs
You also mentioned that you’re thinking about both index funds and ETFs. There are pros and cons to each option, which I review in more detail here but because you have said that you have a large lump sum of cash to invest, I would lean towards an ETF. The simple reason is that the MERs are lower and you don’t need the ability to invest in small monthly increments that index funds readily provide.
I’m encouraged to hear that you and your husband are taking charge of your financial future. Good for you. And once you get the plan in place you can focus your attention on more interesting things—like how you want to spend your time once he has much more of it on his hands.